Sovereign Gold Bonds vs Fixed Deposits: Which is the Better Investment Option?

Last Updated : Jan. 23, 2023, 1:05 p.m.

Investing in gold has always been a popular option for Indians. With the introduction of Sovereign Gold Bonds (SGBs) by the Government of India, investors now have an additional option to invest in gold. In this article, we will compare the features of SGBs and Fixed Deposits (FDs) to help investors make an informed decision. We will examine the key differences between the two investments, their respective advantages and disadvantages, and the ideal investor for each option. By the end of this article, you will be better equipped to decide which option is best suited for your investment goals.

Sovereign Gold Bonds

Investors can invest in gold using Sovereign Gold Bonds (SGBs), a government-backed vehicle, without purchasing actual gold. The Reserve Bank of India (RBI) issued the bonds on behalf of the Indian government. The bonds have a fundamental unit of 1 gram and are expressed in multiples of gram(s) of gold. The bond has an 8-year term with a 5-year exit option that can be exercised on interest payment days.

The price of the bonds is determined in Indian Rupees based on the weekly (Monday through Friday) simple average closing price of 999-purity gold published by the India Bullion and Jewellers Association Limited (IBJA). On the initial investment amount, the investors receive interest at a rate of 2.50% annually. The investor’s bank account receives the interest twice a year.

The price of the bonds is determined in Indian Rupees based on the weekly (Monday through Friday) simple average closing price of 999-purity gold as published by the India Bullion and Jewellers Association Limited (IBJA). On the initial investment amount, the investors receive interest at a rate of 2.50% annually. The investor’s bank account receives the interest twice a year.

The bonds are tradable on the stock exchanges within a fortnight of their issuance. The redemption price of the bond is based on the prevailing price of gold at the time of redemption. The redemption price will be in Indian Rupees on the basis of the simple average closing price of gold of 999 purity published by the IBJA for the week preceding the redemption date.

The bonds are convertible into Demat form and are acceptable as loan collateral. The bonds can also be converted into gold coins and bar denominations.

The bonds are exempt from wealth tax and capital gains tax. The gains arising on redemption of the bonds are taxed as capital gains. The gains are taxable as long-term capital gains (when the bonds are held for more than three years) and short-term capital gains (when the bonds are held for less than three years).

The bonds are an ideal investment option for those looking to invest in gold without having to buy physical gold. They offer the convenience of trading on the stock exchanges and the security of being backed by the Government of India.

Fixed Deposit

A fixed deposit or FD is a financial product provided by banks or NBFCs that provides investors with a higher interest rate than a conventional savings account up until the maturity date. It may or may not need the creation of a new account. The deposited money is held by the bank or NBFC for a set period of time, usually between seven and ten years, at a set rate of interest. Savings account interest rates are lower than the interest rate paid on FDs. The deposited amount is kept with the bank or NBFC for a fixed tenure ranging from 7 days to 10 years at a fixed interest rate. The interest rate offered on FDs is higher than the rate of interest offered on savings accounts.

The amount invested in Fixed Deposits is not subject to market fluctuations and is guaranteed to earn a fixed interest rate throughout the tenure. Fixed Deposits are considered to be one of the safest investments as they are backed by the government and are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Fixed Deposits are ideal for investors who are looking for a safe and secure investment option with a guaranteed return. They are also suitable for investors who are looking for a regular source of income. FDs can be used to meet long-term financial goals such as retirement planning, children’s education, etc.

Fixed Deposits can be opened by individuals, Hindu Undivided Families (HUFs), companies, trusts, societies, etc. The minimum amount required to open an FD account varies from bank to bank. FDs can be opened for a period ranging from 7 days to 10 years. The interest rate offered on FDs is higher for longer tenures.

Fixed Deposits can be opened in the form of single deposits or joint deposits. Joint deposits can be opened with two or more individuals. The maturity amount is paid to the first account holder in case of joint deposits. Fixed Deposits can be opened in the form of cumulative deposits or non-cumulative deposits. In cumulative deposits, the interest is compounded quarterly, and the principal amount and the interest earned are paid at the end of the tenure. In non-cumulative deposits, the interest is paid out at regular intervals.

Fixed Deposits can be closed prematurely, but the bank or NBFC may levy a penalty for early withdrawal. The penalty varies from bank to bank. FDs can be used as collateral for taking loans from banks and NBFCs. The loan amount is usually up to 90% of the FD amount.

FDs are considered one of the safest investments as they are backed by the government and insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). They are ideal for investors who are looking for a safe and secure investment option with a guaranteed return.

Sovereign Gold Bonds and Fixed Deposits

Sovereign Gold Bonds (SGBs) and Fixed Deposits (FDs) are two different investment options. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GoI) and are backed by the sovereign guarantee of the GoI. On the other hand, FDs are issued by banks and other financial institutions. The main difference between SGBs and FDs is the type of asset they invest in. SGBs are gold-backed bonds, while FDs are deposits made with a bank or financial institution. SGBs are denominated in Indian rupees and can be used to purchase gold in the form of coins or bars. FDs, on the other hand, are denominated in the currency of the country in which the deposit is made and can be used to purchase a variety of assets. Another difference between SGBs and FDs is the interest rate. SGBs offer a fixed rate of interest, which is currently 2.5% per annum. FDs, on the other hand, offer a variable rate of interest, which the bank or financial institution determines. Finally, SGBs are subject to capital gains tax, while FDs are not. This means that any profits made from SGBs are subject to taxation, while profits made from FDs are not.

What is the difference between Sovereign Gold Bonds and Fixed Deposits?

Sovereign Gold Bonds (SGBs) and Fixed Deposits (FDs) are two different investment options. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GoI) and are backed by the sovereign guarantee of the GoI. On the other hand, FDs are issued by banks and other financial institutions.

The main difference between SGBs and FDs is the type of asset they invest in. SGBs are gold-backed bonds, while FDs are deposits made with a bank or financial institution. SGBs are denominated in Indian rupees and can be used to purchase gold in the form of coins or bars. On the other hand, FDs are denominated in the country’s currency, where the deposit is made and can be used to purchase various assets.

Another difference between SGBs and FDs is the interest rate. SGBs offer a fixed rate of interest, which is currently 2.5% per annum. FDs, on the other hand, offer a variable rate of interest, which is determined by the bank or financial institution.

Finally, Sovereign Gold Bonds are subject to capital gains tax, while Fixed Deposits are not. This means that any profits from SGBs are subject to taxation, while profits from FDs are not.

Conclusion

Sovereign Gold Bonds and Fixed Deposits are both great investment options for those looking to invest in gold. Sovereign Gold Bonds offer the convenience of investing in gold without having to physically store it, while Fixed Deposits offer a higher rate of return and a more secure investment option. Ultimately, deciding which option to choose depends on the investor’s individual needs and preferences. Both options have their own advantages and disadvantages, so it is important to weigh them carefully before making a decision.